SandRidge Energy: Plenty of Value Potential

Updated

Over the past year, SandRidge Energy Inc. (NYSE: SD) shares are up more than 12%, and based on today's price and the consensus target price, the company sits on an implied gain of about 31%. That's usually a little rich and could indicate wishful thinking on the part of some analysts. But in this case, there is reason to think that today's discount prices don't take into account the company's potential.

In an investor presentation last week, the company enumerated three, three-year objectives: EBITDA of at least $2 billion; capex funded with cash flow; and paying down debt. The company has been pretty successful at switching its drilling activity from natural gas to oil, and in two major fields of operation SandRidge sits on over 500 million barrels of oil equivalent, of which 257 million barrels are oil.

In one of its major fields, the Mississippian play in Oklahoma and Kansas, the company has 432 wells drilled and is producing an average per well of 335 barrels of oil equivalent per day from a total of 364 producing wells. Production from this field has grown by 3x between the second quarter of 2011 and the second quarter of this year, and SandRidge claims that it holds leases on around 8,000 more potential drilling locations in the play.

Shares were hit early this year as the company expanded its capex spending, but the drilling program has been paying off and if SandRidge can achieve its goal of funding capex out of cash flow going forward, meeting its other two medium-term goals is easily possible. But that's the key -- SandRidge needs to keep up its drilling program and everything else should follow. Provided that crude oil prices don't completely collapse of course. But how likely is that?

Shares of SandRidge are up 3.7% today at $7.34 in a 52-week range of $5.55 to $9.04. The consensus target price on the shares is $9.61.

A copy of the company's presentation is available here.

Paul Ausick

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